Friday, May 23, 2008

Hit by costly raw materials - GK Foods 'scours' the world for supplies

Published: Friday May 23, 2008

Leading food manufacturer and distributor, GK Foods, a division of GraceKennedy Limited, is scoping out new suppliers of raw materials in a fight to rein in operational costs, to keep shelf prices down and put profits back on track.For the past six months, the company has failed to totally inure its market from the effects of higher global prices which continue to set new records in the grain and energy markets, announcing last week that prices on six of its basic food lines sold under the Grace brand, have spiked as high as 120 per cent.

Chief executive officer of GK Foods, Erwin Burton, said the company was facing direct increases on the price of raw material and the finished products it imports from overseas suppliers, and to a lesser degree, higher shipping costs.

There is no indication that the price hikes have affected volume sales.

10 per cent growth

In fact, GraceKennedy chairman Douglas Orane announced to shareholders at the release of the March quarter results that sales of the Grace-owned brand grew 10 per cent over the prior year period.

GK Foods, Orane said in a statement accompanying the earnings report, had also launched a range of Grace Cranberry Juices in the Caribbean markets and three new variants of flavoured corned beef in the Jamaican market.

But the changing market conditions havetaken toll on food profits, with GraceKennedy's first quarter results, while depicting a solid performance for the group, indicated lower earnings for food trading, whose pre-tax profit fell 15 per cent.

GK Foods has not said how much more it is costing the division to produce its brands, but the group, whose operations extend beyond food to banking and insurance, money services and retailing, added $3 billion to its production costs in the March quarter.

"Our supply chain managers are scouring the world looking for products and raw material which are competitive," Burton told the Financial Gleaner this week.

"Our main responsibility and concern is that we want to make sure the food we supply is available and at the most competitive prices."

GraceKennedy, he said, imports 40 to 45 per cent of its total range of products, either in the form of finished or packaged goods or raw materials.

In the first quarter ending March 2008, the group's cost of sales, which is used as a proxy for production costs, climbed by 31 per cent to $12.9 billion.

Slight decline

While the group's consolidated results for cost of sales are not stripped down according to business segments, GraceKennedy in the period saw a slight decline in gross profit margin from 6.7 per cent to 6.1 per cent.

Last Friday, at an investor's briefing that came in the wake of a lucrative first quarter for the conglomerate - the group reported a 30 per cent growth in revenues and 7.1 per cent hike in net profit to $695.7 million - Burton said over the past six months Grace branded corned beef had risen 70 to 120 per cent; rice rose 59 to 90 per cent; dairy products, mainly cheese, moved up by 70 per cent; mackerel, 59 per cent; and Vienna sausages, 13 per cent.

The level of pass-through of higher costs to shelf prices was not immediately clear.

"We absorbed some," said Burton.

"I cannot say how much right now, but not all of it was passed on to the consumer."

Across the board

The GK Foods head also said that the increases were not contained to six products, but occurred generally across the company's range of foods.

"For example, ketchup increased by about 22 per cent," he said.

GraceKennedy buys tomato paste from several places in Europe, where such commodities are subsidised, he adds.

But the conglomerate is now facing higher costs to acquire the paste as pressure mounts on countries in the European Union bloc and United States to cut subsidies, which are seen as a breach of international trade rules.

"The impact of the reduction is about a 30 per cent increase for us here," Burton said.

The company imports mackerel and rice as finished products, with rice being processed out of the United States and St Vincent.

Corned beef is processed and canned in South America.

The raw material for cheese is imported from New Zealand then processed and packaged locally, while the raw material for Vienna sausages is sourced in the US and the product manufactured domestically.

GK Foods operates four factories in Jamaica, which churn out 55 per cent to 60 per cent of the company's inventory of products, according to Burton.

Another 10 per cent is outsourced to third party factories.

Essentially, some 65 per cent of Grace products are made locally; the rest is done overseas and imported for distribution.

Record turnover

Last year, GraceKennedy, with its food division in the lead on revenues, reported a record turnover of $49 billion. Food continued to march forward in the first quarter of 2008, spiking 41 per cent to $8.3 billion, relative to Q1 2007, but also accounting for 60 per cent of total revenues, reported at $13.8 billion in the January to March 2008 period.

Profits for food trading, however, fell from $274 million to $234 million.

But Burton said it was a matter of timing, and that his division anticipated a recovery and higher profits over last year.

"There was a problem where we lost an agency and that has impacted us," said Burton, referring to the loss of a supplier in the United States.

One of the products lost was Eli's cheese cake supplied by an agent out of Ohio and distributed by GraceKennedy through its UK operation.

"We are looking at a replacement for these brands," said the GK Foods CEO, who adds that a new arrangement was to be finalised by the end of May.

Burton anticipates that by September, the end of the conglomerate's third quarter, GK Foods' performance will return to projected profit levels.